Friday, June 15, 2018
Equity Market Recap
· U.S. stocks end lower, but rallied in the afternoon, closing well off its worst levels as escalating trade tensions between the U.S. and China intensified today. The Dow Industrials fell nearly 300 points at one juncture while the Nasdaq Composite pulled back from its closing record highs yesterday. Stocks dropped as President Donald Trump announced that the U.S. will implement a 25% tariff on $50 billion of goods from China related to intellectual property and technology, and pledged to impose further levies if the Asian nation takes retaliatory measures. Well in the afternoon, China retaliated as they too announced tariffs on agriculture and auto products US goods staring July 6th. The biggest sector underperformers included capital goods, technology hardware, metals/mining, solar and automakers amid the U.S.-China trade concerns. Commodity prices were among the biggest casualty today on the China tariff news, with gold falling 2.3% to its lowest level this year and oil prices tumbling as well.
· Despite what was supposed to be a potentially risky week for U.S. stock markets, major averages held up relatively well outside of today’s pullback. Markets overlooked a shaky G7 meeting last weekend that failed to produce a positive outcome on trade with the EU, Canada and others. Stocks did very little despite the historical meeting between President Trump and North Korean Leader Un. Central bank action impacted currency markets after FOMC raised rates by 25 bps and raised its outlook for four total rates in 2018, while the ECB decided to keep interest rates unchanged and laid the groundwork for ending its asset purchase program, which crushed the euro. The Bank of Japan stuck to its easing policy, keeping short-term interest rate at minus 0.1%, but had no impact on stocks. Even “hotter” inflation data this week in the form of CPI and PPI failed to rally Treasury yields, though the dollar did end the week just off 2018 highs. Next week, focus likely will be on oil, as OPEC holds its semi-annual meeting.
· The Empire State manufacturing survey rose 4.9 points in June to a reading of 25, the highest reading since October and topping the 18.8 estimate; solid gains for both new orders rising to 21.3 from 1.0 prior while the employment index jumped 10.3 points to a reading of 19. Though down slightly on the month, the prices paid index was a very high 52.7 (down from 54.0 prior)
· Industrial production for May fell (-0.1%) missing the 0.2% estimate and after rising 0.9% in April. Industrial Production was revised up to 0.9% from 0.7% in April. Capacity utilization fell to 77.9% from 78.1% in April, revised up from 78%.
· University of Michigan prelim consumer sentiment survey for June rose to 99.3 vs. 98.0 prior month and came in above the 98.5 estimate; the current economic conditions index rose to 117.9 vs. 111.8 last month and the expectations index fell to 87.4 vs. 89.1 last month. Current economic conditions second-highest reading since May 2000 and Consumer expectations index at lowest level since January.
· Energy futures end broadly lower, with WTI crude sinking -$1.83 or 2.7% to settle at $65.06 per barrel, their lowest settlement in more than a week (down about 1% for the week) amid expectations that OPEC and its allies will decide to boost production next week. Energy prices were battered after the U.S. announced a list of $50B of Chinese goods targeted for tariffs. China followed with tariffs on $34B of U.S. agriculture and auto products beginning on July 6. Note OPEC, along with 10 big nonmember oil producers led by Russia, agreed in late 2016 to hold back crude production by about 1.8 million barrels a day beginning in 2017. The pact is set to expire at the end of this year. The compliance rate among OPEC members was 158% in May (meaning they cut 158% of the agreed-upon daily reductions), said the International Energy Agency
· Gold prices sink, with August gold dropping -$29.80, or 2.3% to settle at $1,278.50 an ounce, its lowest settlement of 2018 amid a broad move lower for commodity prices on trade concerns with China today after the U.S. imposed new tariffs.
· The U.S. dollar index (DXY) ended lower at 94.75 after topping the 95 level earlier this morning (best levels of 2018 at 95.13 highs) as the euro bounced back above 1.16 after falling 1.5% yesterday following the ECB meeting results. The greenback fell vs. the safe-haven Japanese yen, but was little changed while the dollar jumped against emerging markets again (big sell-off this week for Canadian and Aussie dollar, as well as Mexican and Argentine Peso). Increasing trade rhetoric between the U.S. and trade counterparts this week after a failed G7 meeting, led to weakness in emerging markets. Declining oil prices also weighed on emerging market currencies. The Argentine peso resumed its slide toward a historic low, with its century bond yield rising to a record 9% after a shakeup at the central bank according to Bloomberg.
· Bonds ended the day and week higher as yields fell despite mixed economic data today and a rising outlook for additional rate hikes at the Fed this year (up to four from three) after this week’s meeting. Today saw strong manufacturing data for New York and higher confidence data out of Michigan, but industrial production surprised to the downside. Treasury yields slipped across the board, with the 10-yr as low as 2.89% (down 3 bps) and 2-yr at 2.54% (down from 2.6% this week) as investors rotate into safe-havens on trade concerns with China.
Sector News Breakdown
· Consumer related sector fairly quiet on news today; Retailers; GOOS rises after posting an unexpected higher on significantly better revs; VNCE shares outperformed following its quarterly earnings results; in leisure, HOG rises as KeyBanc positive saying they believe the near-term setup on HOG is improving, with our channel work pointing to a solid inflection in May domestic retail that is carrying into June; Consumers/Restaurants at 52-week highs today: GOOS, TCS, LULU, DPZ, W, TXRH
· Energy stocks remained under pressure as oil prices sank despite bullish inventory mid-week. Focus turns to upcoming OPEC meeting next week. Solar stocks hammered early on the trade war concerns/fears with China; shares of SEDG, FSLR, SPWR, JKS, and CSIQ all fall sharply. Baker Hughes (BHGE) weekly total rig count showed total rigs fell -3 to 1,059, while oil rigs rose 1 to 863 and gas rigs fell -4 to 194.
· In stock news; RIG announced the scrapping of four rigs – ultra deepwater drillships Deepwater Frontier, Millenium and Discovery as well as the midwater semisubmersible Songa and will take a $520 million charge in Q2; refiners dipped (VLO, HFC, DK, PBF) with oil weakness, though Citi positive on group saying refining shares can increase by an avg. 30% over the next 6-12 months, on the back of differential and IMO 2020 tailwinds.
· Large Cap and Regional banks fall; sector lower as yields extend drop (10-yr at 2.90%, down 10 bps from mid-week highs above 3%); shares of BAC trade down at 200-day MA support 29.04, while group remains weak despite the FOMC rate hike and bullish outlook on economy; in insurance, BHF 23.16M share Secondary priced at $44.50
· Credit card data; monthly data showed: 1) BAC May net-charge-offs (NCOs) default rate 2.98% vs. 2.96% last month and delinquency rate 1.55% vs. 1.63% last month; 2) COF May Credit Card Charge-Offs 4.72% vs. 5.04% the prior month and May credit card delinquencies 3.22% vs 3.33% in April; 3) DFS May charge-off rate 3.4% vs. 3.2% last month and delinquency rate 2.2% vs. 2.3% last month; 4) ADS May Charge-Offs 6.4% vs April 6.3% and May delinquency rate 5.4% vs 4.9% YoY; 5) JPM May net credit losses 2.56% vs. 2.63% last month and delinquency rate 1.11% vs. 1.17% last month; 6) SYF May net charge-off 5.26% vs. 5.64% last month and reports May delinquency rate 2.73% vs. 2.84% last month
· REITs; JPMorgan with sector call saying following significant underperformance they turn more bullish on the group heading into H2; economic fundamentals are healthy and supply growth should moderate; meanwhile, REIT earnings growth will actually accelerate into ’19 (while it decelerates for the SPX); valuations for the group are reasonable. Upgrade KIM/LPT/PSB/TCO and downgrade ROIC/RPAI/STAG; top picks TCO, KIM, DRE, HCP, TIER, AMH, CPT, VER
· Lending and finance; TREE was defended at Susquehanna, which sees the company’s recent selloff on cautious commentary as overdone/said TREE’s revenue diversification is improving, though he understands investor caution
· Large Cap Pharma; TEVA said it will terminate Phase 3 development of fremanezumab for chronic cluster headache due to lack of efficacy; GBT’s voxelotor shows lower treatment effect in adolescents with SCD in mid-stage study; ARQL active after reporting preliminary Phase 1 results of ARQ 531 in patients with relapsed or refractory hematologic malignancies; BMY said its Opdivo cancer drug approved in China in Non-Small Cell Lung Cancer; VRCA 5M share IPO priced at $15.00 (shares opened at $20
· Biotech movers; AFMD shares fell after the percentage of complete metabolic responses for a combination of AFM13 highest dose with MRK’s Keytruda in Hodgkin lymphoma disappointed investors; BLUE rises after reporting well received data in severe sickle cell disease and transfusion-dependent beta-thalassemia (TDT) at the European Hematology Association; AMAG said it would sell its Cord Blood Registry to PE firm GI Partners for $530M cash to pay debt; BLUE falls after positive update on sickle cell disease as Cantor says shares fundamentally overvalued; SELB unveils expanded positive clinical data for its gout treatment; SRPT tgt raised to $120 at Baird ahead of R&D day next week, which they expect to be positive
· Medical services, devices & equipment movers; Canaccord said they see more upside in MedTech despite a robust 38% YTD gain, as they raise tgt prices on EXAS, QDEL and IDXX; CRL was upgraded to overweight and Street high $130 tgt at KeyBanc calling it one of the best risk-reward stories among biopharma outsourcing stocks heading into 2H; MDT got FDA approval for 200mm and 250mm lengths of the IN.PACT Admiral drug-coated balloon to treat long superficial femoral artery lesions in patients with peripheral artery disease
Industrials & Materials
· Transports; airlines active as ALK cuts outlook for 2Q capacity growth to about 8%, down from prior 8.5% view and cuts year capacity growth outlook to 6.2%-6.5%, had seen about 7.5% in January; LUV was downgraded to hold at Argus as they expect them to grow more slowly than the international market this year; FDX reports earnings in package delivery space next week
· Metals & Mining; metals sector weaker amid trade dispute with China, overshadowing better steel guidance; ATI was downgraded to underweight at JPMorgan citing valuation; in steel space, positive guidance from both SCHN and STLD (after NUE guided higher yesterday as well); SCHN guides Q3 EPS $1.22-$1.28 vs. est. 98c, while STLD guided Q2 EPS $1.46-$1.50, topping the $1.39 estimate saying profitability from steel operations is expected to be meaningfully higher than sequential first quarter results/average quarterly steel product pricing is expected to increase more than scrap costs, as steel pricing across the platform has improved throughout 2Q
· Chemicals; LYB says it has started talks with Braskem (BAK) controlling shareholder Odebrecht regarding a “potential transaction” between the companies
· Packaging companies weaker (PKG, IP, WRK, GEF) after containerboard and box data for May was released, and BMO thinks it fell “modestly below expectations.”
Technology, Media & Telecom
· Media stocks surging this week after the T/TWX merger was completed and after CMCSA topped DIS bid for FOX assets offering $65B (DIS bid was $52B)…shares of CBS up about 10% this week, VIAB +5% this week, AMCX +13.5%, DISCA up 16% this week; LGF/A up 11% this week
· Semiconductors; NXPI shares jumped on report Chinese regulators have approved QCOM’s acquisition of the chipmaker, according to a report from the South China Morning Post, which would be the final hurdle to approval for the $44 billion deal.
· Software movers; SPLK downgraded to sell at Citigroup as see growth drivers plateauing, some warning signs in numbers and shares vulnerable with valuation in-line with high-growth SaaS app players; ADBE reported top and bottom line quarterly beat, as analyst take targets higher, but shares slipped after trading at all-time highs prior (profit taking); AVLR 7.5M share IPO priced at $24.00, while shares opened above $35; MANH was upgraded at Benchmark
· Components; in optical, FNSR reported in-line revenue and weaker-than-expected earnings for its April-ended quarter, partly due to a fall in revenue from its VCSEL laser arrays for 3D sensing applications, while Q4 outlook also missed views (LITE, OCLR, ACIA, CIENcomps); JBL shares plunged after mixed results as quarterly sales beat but only on penny EPS beat amid lower tax rate, while guidance for year brackets estimates for EPS on better revs; OLED shares after WSJ report that AAPL plans to “stick with cheaper screens” with its upcoming iPhone line due to the price sensitivity of its customers